The function of money

To show the motivation behind our proposed solution, let us consider how money functions in an economy:

In the absence of money, individuals in the economy can only exchange what they produced for what others produced if there is a “double coincidence of wants” — when both parties have the products the other party wants. This makes commerce exceedingly inefficient and results in low economic output and growth. Money, therefore, acts to facilitate commerce and economic growth. To do so, money must act simultaneously as a unit of account, a store of value, and a medium of exchange.

Unit of Account: assuming any two scarce products can have an exchange rate between them (i.e., 3 apples for 7 potatoes, 20,000 apples for a car, and so on) we can conceive of a common denominator against which all products and services in the economy can be measured and then use it as a unit of account throughout the economy. Since resources in the economy are scarce, the supply of money must be scarce and stable (or at least change in a predictable manner) for it to be an effective unit of account.

Store of Value: for money to be a good store of value it must maintain its value over time. For fiat currencies, this would partly mean being able to credibly demonstrate political stability and a disciplined monetary policy over the long term. For cryptocurrencies this would also mean demonstrating sustained demand for the coin.

Medium of Exchange: for money to be a good medium of exchange it must be divisible, widely accepted, and convenient to transact with at scale. At the moment of writing, the greatest challenge for cryptocurrencies is scaling the number of transactions per second (while maintaining the security of the network) — yet, the scalability issue appears solvable in the near future.